Argus Books A Lower Rating On Expedia After Guidance Cut

Expedia Inc EXPE failed to meet the consensus forecast in its Oct. 26 third quarter earnings report. The stock traded sharply lower and has yet to improve.

The Analyst

Argus Research's John Staszak downgraded Expedia from Buy to Hold and maintained a long-term Buy rating on the stock.

The Thesis

The analyst downgraded Expedia due to company's lower 2018 guidance and potentially higher spending on employee compensation, technology and marketing next year, he said. (See Staszak's track record here.) 

The higher spending is necessary in order to compete, but will have a negative impact on operative margins and free cash flow, the analyst said. Expedia will benefit over time from growth in online travel bookings, as well as increased business in China and other emerging markets, Staszak said. 

Argus projects an increase in gross margin to 19.6 percent due to cost savings from the Orbitz acquisition and growth in the higher-margin advertising business.

Expedia is fairly valued at 27.4 times the 2017 EPS estimate, Staszak said. 

The Price Action

Expedia fell around 0.6 percent Tuesday and has fallen 17.5 percent since the earnings report. 

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